Look Back in Poverty: Blodget Turns to Books

Herein, a cautionary tale: How to Lose Your Shirt for Dummies.

Internet investors are licking their lips over that $2 million Henry Blodget will reportedly pocket upon leaving Merrill Lynch ( MER).

Think of it: 2 million bucks. You could do a lot with that kind of scratch. Pay off your creditors. Stop foreclosure of your home.

Put it to work in the market!

Wait. That's how this mess started. For the thousands of investors who rode the Merrill wonder boy's dot-com picks from rags to riches and back to rags again, the thought of trying their luck again on Wall Street, particularly on Internet companies, has all the appeal of groin surgery.

Remember, this is the crowd that piled into CMGI ( CMGI) iVillage ( IVIL) and Webvan on Blodget's urging, only to see those companies bludgeoned, in some cases clean out of existence.

Blodget, who recently got married, says he's leaving Merrill to write a book, among other things. In it (according to The New York Times), he'll explain, though not defend, his behavior during the Internet bubble. Good thinking.

Merrill is reportedly paying Blodget $2 million to buy out his contract. That amount might seem large to investors who were impoverished by the Internet bubble, but it's hardly an eye-popping sum by Wall Street standards. Blodget himself is reported to have rung up yearly compensation of $5 million during the height of the Internet frenzy.

Still, $2 million goes a long way in the market. One way of seeing how far is to look at how much you would've made if you invested it in some of Blodget's picks since he started at Merrill three years ago.

For fun, TheStreet.com took a look at how Blodget would have fared if he'd spent the buyout money he's getting now on some of his own recommendations, starting in late 1998. The methodology is simple: Divide $2 million evenly between each of his short- and long-term strategies in five Internet stocks, cutting a position in half with each downgrade and committing the cash back on an upgrade. In the event he went neutral, we sold the stake.

Here's how he'd fare. (Efforts to reach Blodget for this story were unsuccessful.)

Amazon.com

Blodget's highest-profile call, Amazon.com ( AMZN), is also his least costly. The analyst was catapulted to worldwide fame in December 1998 when he worked at CIBC Oppenheimer and predicted the online retailer could go to $400 from $260. The shares readily complied, and then some. The reason Blodget does relatively well on Amazon is because he initiated the stock at a split-adjusted $15.58 in October 1998 and it closed Wednesday at $9.49.

Amazon.com Starting investment value: $2 million

Source: Baseline

Note the February 2000 upgrade, which came about $13 north of a downgrade in October 1999.

Closing value of $2 million: $1.85 million.

Homestore.com

Blodget has primarily thought of Homestore.com ( HOMS) as a long-term buy, initiating it at near-term accumulate and only telling investors they should buy it from March 6, 2000, to July 9, 2001. Unfortunately, the stock lost half its value during that period, falling from $64.50 to $31.01. It kept sliding all the way down to $8.38, when Merrill advised investors to sell the thing, at least for near-term purposes.

Homestore.com Starting investment value: $2 million

Source: Baseline

The stock, which many thought would be a dot-com survivor, has been bashed anew of late after reporting a dismal third quarter and lowering its guidance for the rest of the year. Blodget said in a recent note that the company's management has "credibility problems."

Closing value of $2 million: $453,736.

priceline.com

Blodget initiated his near-term accumulate and long-term buy ratings on priceline.com ( PCLN) just three days before the stock peaked at an all-time high of $162 on April 30, 1999. But the company that was going to revolutionize consumer marketing in America didn't. By Sept. 27, 2000, when Blodget first downgraded the stock, it was already worth just $10.75.

priceline.com Starting investment value: $2 million

Source: Baseline

Closing value of $2 million: $446,392.

eToys

The analyst hung on to his long-term accumulate rating for eToys through November 2000, making his downgrade on the online toy company shortly after shutdowns at Internet retailers Pets.com and MotherNature.com. In November, eToys was projecting profitability by 2002. Earlier this year, the company filed for bankruptcy.

eToys Starting investment value: $2 million

Source: Baseline

Between June 17, 1999, when Blodget initiated coverage with a near-term accumulate and long-term buy ratings, and Nov. 8, 2000, when he downgraded it to long-term neutral, the stock lost 94% of its value.

Closing value of $2 million: $631,000.

24/7 Media

Blodget's gamble on net advertising outfit 24/7 Media ( TFSM) would have cost him the most, reducing his $2 million to just $262,910. One of many net companies brought public by Merrill Lynch, the stock peaked at $64.63 in January 2000. But if you paid any attention to his ratings changes, you wouldn't have gotten rid of it until August of that year, when it was going for around $10. On Nov. 14, the stock closed at 31 cents.

24/7 Media Starting investment value: $2 million

Source: Baseline

The company is still running, however, and just recently announced plans to acquire Real Media from Swiss media group PubliGroupe in a stock deal valued at about $2.7 million.